Volatility Is Still Low. What next?

December 8, 2017



After challenging its mid-Cycle resistance at 14.39 last week, VIX declined to an 85% retracement. A breakout above the Ending Diagonal trendline suggests a complete retracement of the decline from January 2016, and possibly to August 2015. The December target may be the Cycle Top at 23.46.

(WSJ) A summary of markets this year requires only two words: Low volatility.

Stocks climbed to repeated record highs at such a leisurely pace that 2017 may be among the least choppy years in history. The Cboe Volatility Index, the market’s so-called “fear gauge,” hit an all-time low and the S&P 500 observed its longest streak without falling more than 0.5% in five decades. There have been zero daily 2% price swings; last year, there were eight.


SPX testing its Cycle Top support.


SPX tested its double trendlines and weekly Cycle Top support at 2637.03, closing above the 6-year upper trendline. The Cycles Model proposes a pullback next week. Should it break Intermediate-term support and the trendline at 2543.08, the decline may be severe.

(Reuters) – Wall Street ticked higher on Friday after a stronger-than-expected jobs data for November showed that the world’s largest economy has gained strength, ahead of a near certain interest rate hike next week.

The Labor Department’s closely watched employment report showed job growth increased at a strong clip in November and wages rebounded.

Nonfarm payrolls rose by 228,000 jobs last month amid broad gains in hiring as the distortions from the recent hurricanes faded. Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month.

Average hourly earnings rose 0.2 percent in November after dipping 0.1 percent the prior month. That lifted the annual increase in wages to 2.5 percent from 2.3 percent in October.


NDX stalls beneath Cycle Top resistance.



NDX declined to challenge Short-term support at 6269.51 then rallied to close beneath its Cycle Top at 6372.23. A decline beneath the lower Diagonal trendline at 6180.00 and Intermediate-term support may produce a sell signal.

(NorthmanTrader) No period is worse for bears than when it’s the best time to sell stocks. It’s the polar opposite of when conditions are worst for bulls, right when it’s the best time to buy as it was in January-March 2009. The exhaustion factor is enormous. It’s called capitulation as moves get stretched to the extreme even though the set-up is valid.

November’s close marked the 13th consecutive month straight up for global markets. Nothing but up with fewer and ever smaller dips in between. Deutsche Bank’s Reid illustrated the point: “We’ve never had such a run with data going back over 90yrs”. I’d say that qualifies as the worst of time for bears.

Yet we could be sitting on a generational opportunity to sell equities as it could be argued that conditions will never be better for bulls as the game of offering carrots of free money is coming to an end. Indeed it could be argued that the prospect of tax cuts is the final carrot the free money scheme has to offer. The carrot top. No more carrots.


High Yield Bond Index stalls at the high.


The High Yield Bond Index made a new high on Monday, then declined through Wednesday, closing the week at a nominal new high.  A break of the Cycle Top at 187.46 may tell us the rally is over. A sell signal may be generated with a decline beneath the lower Diagonal trendline at 179.00.

(CFAInstitute) The Doomsday Moment in Jochen Felsenheimer’s presentation at the 2017 CFA Institute European Investment Conference came during the question-and-answer session, but if you’re new to this game and weren’t in attendance, you’re forgiven for thinking it came earlier.

Felsenheimer, a high-yield and distressed portfolio manager with XAIA Investments, began by warning that his presentation, “The Devil in Disguise,” would be pessimistic. Then he made a strong case that risk in high-yield markets is as high as it has ever been.


USB continues its consolidation.


The Long Bond challenged Intermediate-term resistance at 153.51 before declining to close above Long-term support at 152.81. The Cycles Model suggests a potential decline of short duration but may be quite strong.

(WSJ) U.S. government bonds slipped Friday after the monthly jobs report showed ongoing strength in the labor market but tepid wage growth.

The yield on the benchmark 10-year U.S. Treasury note ticked up to 2.383% from 2.374% on Thursday, capping two consecutive weeks of yield gains. Yields rise as bond prices fall.

Yields swung briefly then steadied after data showing U.S. employers hired workers at a healthy rate in November and the unemployment rate maintained its 17-year low. Nonfarm payrolls rose a seasonally adjusted 228,000 in November, higher than what economists surveyed by The Wall Street Journal expected.


The Euro has begun its decline.



The Euro declined through Intermediate-term support at 118.10 to close above its Short-term support at 117.60. This indicates a potential decline may have begun that should extend through the month of December.

(Bloomberg) The euro fell on Friday for the sixth consecutive day, on course to extend its longest run of losses in more than a year against a resurgent U.S. dollar.

As progress of American tax reform and a delayed U.S. debt deadline spur the greenback, traders are finding few fresh catalysts to get them excited about the common currency just now. The next could be the European Central Bank meeting in the coming week, when President Mario Draghi announces updated economic projections for the region.


EuroStoxx consolidates above Intermediate-term support.


The EuroStoxx 50 Index bounced from Intermediate-term support at 3554.39 to consolidate yet another week beneath Short-term resistance at 3599.66. A stumble here has the potential to set off a cascading decline into motion through the end of the year.

(Reuters) – European stocks rallied to a week’s high on Friday as Britain and the European Union announced a breakthrough in Brexit negotiations and new global banking regulations appeared kinder to European banks than had been expected.

The European Commission said enough progress had been made after it worked through the night with the United Kingdom to end an impasse over the status of the Irish border, which had scuppered an earlier attempt to clinch a deal on Monday.


The Yen declines beneath supports.





The Yen pulled back below its support cluster to make a 57% retracement of the impulse off the low. Should the pullback be complete, the Yen may rally back through the support/resistance cluster to new highs. There may be a lot of stored up energy in this move.

(TheMacroTourist) I am aware of all the doomsday Yen hyper-inflationary predictions due to their soaring debt-to-GDP ratio. And these Japanese bears very well might prove correct… In the long run. But as Mr. Keynes taught us, the long-run is an awfully long time. In the meantime, I think there is a terrific opportunity in Japanese assets, and that also includes the currency.

This flies in the face of most market pundits’ forecasts. You will often hear recommendations to buy Japanese equities, but they will often be couched with warnings that it needs to be done on a “currency hedged basis.” And it’s easy to see why.


Nikkei bounces off its Cycle Top.


The Nikkei found support at its Cycle Top and made a lesser retracement this week. A break beneath the Cycle Top and Short-term support at 22268.54 suggests the rally is over and may produce an aggressive sell signal. Confirmation comes at the crossing of the lower Diagonal trendline just above Long-term support at 20195.58.

(JapanTimes) Stocks continued to surge Friday on the Tokyo Stock Exchange, buoyed by the yen’s weakening against the dollar.

The 225-issue Nikkei average soared 313.05 points, or 1.39 percent, to close at 22,811.08. On Thursday, the key market gauge jumped 320.99 points.

The Topix index of all first-section issues finished up 17.48 points, or 0.98 percent, at 1,803.73, after climbing 20.83 points the previous day.


U.S. Dollar makes a Fibonacci retracement.

US Dollar

USD bounced above Intermediate-term support/resistance at 93.16 to complete a 62% retracement of its decline. The Cycles Model calls for a week-long decline while the Orthodox Broadening Top formation calls for a breakout beneath the trendline, as indicated by “point 6.”

(BusinessInsider) 2017 has not been the dollar’s greatest year.

Against a basket of G10 currencies, the greenback has lost 8% this year. Even the prospect of tax cuts hasn’t made the dollar more attractive to currency traders.

“It seems to us that the consensus is that the tax reform will not matter much, which is consistent with what our survey data and the feedback during our recent client meetings suggest,” said Athanasios Vamvakidis, the global head of G10 FX Strategy at Bank America Merrill Lynch, in a note on Friday.


.Gold plunges through support.


Gold plunged beneath Long-term support at 1268.27 to begin the next phase of its decline in earnest. The Cycles Model suggests that may proceed to the lower trendline of the Broadening Wedge and possibly trigger that formation over the next 2-3 weeks.

(Reuters) – Gold prices hovered above a four-month low on Friday and were on track for their biggest weekly fall since May after progress on U.S. tax reform fueled optimism about the U.S. economy and boosted the dollar.

Stronger-than-expected U.S. employment data on Friday also demonstrated healthy economic growth and suggested the Federal Reserve will raise interest rates next week, as expected.

Spot gold was up 0.1 percent at $1,247.81 an ounce by 2:34 p.m. EST (1934 GMT), near Thursday’s low of $1,243.71, the weakest since July 26. It has fallen 2.6 percent so far this

week, its third consecutive weekly fall and the biggest since early May.

U.S. gold futures settled down 0.4 percent at $1,248.40.


Crude continues to consolidate beneath the Cycle Top.


Crude challenged Short-term support at 56.05 before closing higher. Oil’s period of strength may be over but a new trend has yet to be established. The odds are strong that we may see the price of oil decline through the end of the year.

(OilPrice) Oil prices rose on Friday morning after Chinese data showed that China’s crude oil imports rose to the second-highest on record in November, and after U.S. total non-farm payroll employment increased last month.

At 10:39a.m. EST on Friday, WTI Crude was up 0.64 percent at $57.05, and Brent Crude was trading up 0.98 percent up at $62.81.

Chinese crude oil imports increased to 9.01 million bpd last month—the second highest on record, according to data provided by China’s General Administration of Customs.


Shanghai Index tests long-term support.

Shanghai Index

The Shanghai Index declined to Long-term support at 3254.71, closing above it. The Shanghai Index mow appears to be on a sell signal. A bounce has started that may last into next week. The Cycles Model suggests that the decline may then resume through early January. The potential for a sharp sell-off rises as the next levels of support are breached.

(ZeroHedgeEvery few days at the moment, it seems, we return to the subject of systemic risk in China related to its big four highly-indebted conglomerates, HNA, Anbang, Evergrande and Dalian Wanda.

Our main source of concern recently has been HNA, after it issued a bond with less than one year to maturity with the extortionately high coupon of 9%. This prompted us to ask whether China was experiencing the beginning of its Minsky moment? The reason for our continuing focus on HNA is its $28bn of short-term debt which matures before the end of next June, much of it accumulated during a binge of acquisition-driven growth which saw it become a major shareholder in Deutsche Bank, Hilton Worldwide and others.


The Banking Index tests its Cycle Top.


— BKX made a new high on Monday as it probed its Cycle Top support at 108.66. A decline beneath the upper trendline of the Diagonal formation suggests the rally is over. A further decline beneath Intermediate-term support at 98.45 may give a sell signal. If the Orthodox Broadening Top formation is correctly identified the next move may be beneath mid-Cycle support at 81.73.

(BankRate) Banks are adding resources to help people impacted by the wildfires burning across southern California.

More than 212,000 people have been evacuated, and at least six fires are burning throughout the region. As of Friday, nearly 26,000 homes are being threatened by the fires, according to California’s Department of Forestry and Fire Protection.

If you have been affected by the fires, consider reaching out to your bank when you can. That’s because banks often offer leniency for those who’ve had their lives upended by natural disasters, including waiving late fees, out-of-network ATM fees and creating repayment arrangements on credit cards and loans.

(Bloomberg) Blindsided by the sudden plunge in Steinhoff International Holdings NVshares and bonds, U.S. and European banks with billions of dollars at stake were told they’d have to wait another week to confront the global clothing and furniture retailer that’s engulfed in an accounting scandal.

The company on Friday delayed a meeting with lenders to Dec. 19 from Dec. 11, citing that full-year earnings that are typically discussed in the annual gathering haven’t been published. The owner of chains such as Mattress Firm in the U.S. and Conforama in France didn’t say whether it planned to report financials before Dec. 19.

(USNews) Even by bitcoin standards, Thursday was a wild ride.

With a few hours, the volatile digital currency surged above $19,000, dropped back below $16,000, and then see-sawed before settling in just above $17,000 late Thursday in the U.S. The wild swings happened just days before trading in bitcoin futures begins on a major U.S. exchange.

Major banks took notice, with three of the biggest saying they will either limit or not allow their clients access to the futures when trading begins next week on the Chicago Board Options Exchange.

The price of bitcoin fell back during Asia’s day Friday, dropping to $15,431.39 as of midnight EST (0500 GMT), according to large bitcoin exchange Coinbase. At the start of the year, one bitcoin was worth less than $1,000.

(ZeroHedgeTo the relief of the banks and investors, the Basel III rule book was “watered down” sufficiently that the announcement that the deadlock had been broken led to a spike in European bank stocks on Friday morning. The sticking point holding back the clarification of Basel III for nearly a year had been how to adjust capital requirements for the risk of assets like mortgages. In particular, how far the banks’ models for calculating risk could diverge from more conservative assumptions – known as the “standardized approach” – used by regulators. Under the compromise deal, dubbed Basel IV, banks’ total risk-weighted assets cannot be less than 72.5% of the amount calculated in the standardized approach.

(ZeroHedgeThe IMF released a new analysis on the instability stability of the Chinese financial system. Speaking to the media in an online briefing, some of the insights from Ratna Sahay, deputy director of the IMF’s Monetary and Capital Markets Department, hardly advanced our knowledge much.

Sahay noted that “Risks are large. Having said that, the authorities are really aware of risks and they are working proactively to contain these risks.”

Have a great weekend!

Anthony M. Cherniawski

The Practical Investor, LLC

2205 Hopkins Avenue

Lansing, MI 48912


Office: (517) 331-5200


Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model.  At no time shall a reader be justified in inferring that personal investment advice is intended.  Investing carries certain risks of losses and leveraged products and futures may be especially volatile.  Information provided by TPI is expressed in good faith, but is not guaranteed.  A perfect market service does not exist.  Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment.  Please consult your financial advisor to explain all risks before making any investment decision.  It is not possible to invest in any index. 

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